Chapter 9 – Profit Planning
150. Allison Company makes luggage. One popular model is the Traveler (a 21″ wheeled carry-on). Budgeted sales for
this model are:
Month
Unit Sales
March
25,000
April
34,000
May
50,000
June
70,000
Desired ending inventory is 20% of the next month’s sales. Inventory on March 1 is 3,100 units. Prepare a production
budget for as many months as possible.
Sales
25,000
34,000
50,000
+ Desired ending inventory
10,000
14,000
Units needed
31,800
44,000
64,000
Less: beginning inventory
Production
28,700
37,200
54,000
ending inventory are based) are unknown.
151. CutMaster Salons anticipates giving 100 permanents in May, 130 in June, and 120 in July. CutMaster needs one
permanent wave kit for each perm, along with two boxes of wave tissues. Its inventory policy is to have 10% of the
following month’s materials needs on hand. On May 1, there were 15 wave kits and four boxes of wave tissues on hand.
(Round any fractions of a unit to the nearest whole unit.)
A.
The wave kits to be purchased in May equal __________________.
B.
The wave kits to be purchased in June equal __________________.
C.
The boxes of tissues to be purchased in May equal __________________.
D.
The boxes of tissues to be purchased in June equal __________________.
A.
May wave kit purchases = 98
B.
June wave kit purchases = 129
C.
May purchases of tissue boxes = 222
D.
June purchases of tissue boxes = 258
152. Foster Company makes power tools. The sales budget for drills for the first four months of the year is:
Gel
$3.50 × (50,000 × 1.05)
$3.50 × (80,000 × 1.10)
Quarter 3
Quarter 4
Foamy
$2.30 × (82,000 × 1.05)
$2.30 × (70,000 × 1.05)
Gel
$3.50 × (90,000 × 1.10)
$3.50 × (60,000 × 1.05)
Chapter 9 – Profit Planning
Month
Unit Sales
January
20,000
February
15,000
March
22,000
April
25,000
Foster has taken a just-in-time approach to production and wants only 5% of the next month’s sales needs in ending
inventory. January 1 inventory of drills was zero. Each drill takes 15 minutes of direct labor at $18 per hour. The factory
overhead formula is $27,000 + $1.20 per direct labor hour.
A.
Budgeted production for January is __________________.
B.
Budgeted production for February is __________________.
C.
Budgeted production for the entire first quarter of the year is __________________.
D.
Budgeted direct labor cost for January is $__________________.
E.
Budgeted direct labor cost for February is $__________________.
F.
Budgeted variable overhead for March is $__________________.
G.
Budgeted total overhead for March is $__________________.
A.
Budgeted production for January = 20,750
[20,750 = 20,000 + 750 − 0]
B.
Budgeted production for February = 15,350
[15,350 = 15,000 + 1,100 − 750]
C.
Budgeted production for the entire first quarter of the year = 58,250
[58,250 = 20,750 + 15,350 + 22,150*]
*(22,000 + 1,250 − 1,100)
D.
Budgeted direct labor cost for January = $93,375
[93,375 = 20,750 × 0.25* × $18]
*(15 / 60)
E.
Budgeted direct labor cost for February = $69,075
[69,075 = 15,350 × .25 × $18]
Budgeted variable overhead for March = $6,645
[6,645 = 22,150 × 0.25 × $1.20]
G.
March budgeted total overhead = $33,645
[33,645 = $27,000 + 6,645]
153. Uma Company production has variable overhead costs of $8 per direct labor hour and fixed overhead costs of
$56,000 per month. Budgeted production for the next three months is as follows:
Month
Production
October
6,000
November
5,500
December
8,000
Each unit requires three hours of direct labor.
A.
Uma’s total variable overhead for October is $__________________.
B.
Uma’s total overhead for October is $__________________.
C.
Uma’s total variable overhead for November is $__________________.
D.
Uma’s total fixed overhead for December is $__________________.
E.
Uma’s total budgeted overhead for the last three months of the year equals
Chapter 9 – Profit Planning
$__________________.
A.
October total variable overhead = 3 × 6,000 × $8 = $144,000
B.
October total overhead = $144,000 + $56,000 = $200,000
C.
November total variable overhead = 3 × 5,500 × $8 = $132,000
D.
December total fixed overhead = $56,000
Total budgeted overhead for the last three months of the year = $636,000
+ ($56,000 × 3 months) = $636,000
$188,000 = $132,000 + $56,000
November Total Budgeted Overhead
$248,000 = 3 × 8,000 × $8 + 56,000
December Total Budgeted Overhead
154. Kanban Company estimated sales of 40,000 units at $6 each. Budgeted cost of goods sold per unit includes $1.20 of
direct materials, six minutes of direct labor time at $15 per hour, and unit overhead cost of $1.30. Kanban pays a sales
commission of 10% of sales revenue. Fixed selling and administrative expenses are budgeted at $25,000. Prepare a
statement of operating income.
A.
Budgeted variable marketing expense is $__________________.
B.
Budgeted operating income is $__________________.
C.
Recalculate budgeted operating income assuming fixed selling and administrative
expenses double and the selling price per unit increases 10%.
Sales ($6 × 40,000)
Cost of goods sold {$1.20 + [(6 / 60) × $15.00] + $1.30} × 40,000
Gross profit
Less: Sales commission ($240,000 × 0.10)
Less: Fixed selling and administrative expense
Operating income
A.
Budgeted variable marketing expense is $24,000.
B.
Budgeted operating income is $31,000.
C.
Budgeted operating income is $27,600. (see table below)
Sales ($6.60 × 40,000)
Cost of goods sold {$1.20 + [(6 / 60) × $15.00] + $1.30} × 40,000
Gross profit
Less: Sales commission ($264,000 × 0.10)
Less: Fixed selling and administrative expense
Operating income
Chapter 9 – Profit Planning
155. You have decided to throw a party next weekend for 19 friends. The friends are going to bring health food, so all you
have to have available are the drinks. You estimate that, on average, each person will drink four bottles of soft drinks.
Three of your friends will drink only natural soda without unneeded color − so Sulo Ginger Ale should work well for
them. For the others and yourself, you decide to buy Sulo Cola. Before going online, you check the refrigerator − you
already have six bottles of Sulo Ginger Ale and 14 of Sulo Cola. Since this is the end of the semester − you decide that
you don’t really want any of the soft drinks on hand after the party. Now, you are ordering on the Internet.
A.
How many bottles of Sulo Ginger Ale do you plan to buy?
B.
How many bottles of Sulo Cola do you plan to buy?
3 friends × 4 bottles
17 friends × 4 bottles
+ Desired ending inventory
Bottles needed
Bottles to purchase
156. Quillin Company had the following budgeted information for October:
1.
October 1 cash balance $3,500
2.
Expected sales 2,500 units at $25 each (half in cash, remainder on credit due in November)
3.
Inventory purchases 3,000 units at $14 each (all in cash)
4.
Rent $1,450
5.
Payroll $1,000
6.
Utilities and other costs $4,500
7.
Accounts receivable balance Oct. 1, $35,000 (includes $700 bad debts allowance;
use this amount for both parts A and D).
A.
What is the budgeted collection on accounts receivable for October?
B.
What are the total cash disbursements for October?
C.
What is the ending cash balance for October?
D.
Assuming sales are collected 75% in the month of sale and 25% the following month,
what is the ending cash balance for October?
A.
$34,300 (see table below)
B.
$48,950 (see table below)
C.
$20,100 (see table below)
Beginning cash balance
Sales in cash (2,500 × $25 × 0.50)
Collections on account ($35,000 − $700)
Cash available
Payments for purchases (3,000 × $14)
Utilities, etc.
Total cash disbursements
Ending cash balance
Chapter 9 – Profit Planning
D.
$35,725 (see table below)
Beginning cash balance
Sales in cash (2,500 × $25 × 0.75)
Collections on account ($35,000 − $700)
Cash available
Payments for purchases (3,000 × $14)
Rent
Payroll
Utilities, etc.
Total cash disbursements
Ending cash balance
157. Fredder Company usually sells about 20% of its merchandise during a month for cash with the remaining sales on
account. The company’s accounts receivable payment history is as follows: 30% in the month of sale, 50% in the month
following, and 15% in the second month following sale. Total budgeted sales for the second quarter are as follows:
April
$100,000
May
120,000
June
80,000
Assume all questions relate to the month of June.
A.
What are the expected cash sales?
B.
What are the expected receipts from accounts receivable for sales made in April?
C.
What are the expected receipts from accounts receivable for sales made in May?
D.
What are the total expected cash receipts?
E.
From the above accounts receivable history information, receipts from accounts
receivable do not equal 100%. Why not? Does this amount appear on the cash budget?
A.
June cash sales = $80,000 × 0.2 = $16,000
$12,000
158. Rivers Company purchases merchandise on account. In general, Rivers pays 50% in the month of purchase and 50%
in the following month. All payments in the month of purchase qualify for a 2% cash discount. First quarter budgeted
purchases are:
January
$90,000
February
80,000
Chapter 9 – Profit Planning
March
96,000
A.
What are the total cash disbursements expected in February?
B.
What are the total cash disbursements expected in March?
C.
Now suppose that there is no cash discount for purchases made in the month of purchase.
Now what are the total cash disbursements expected in February? In March?
A.
$84,200 (see table below)
B.
$87,040 (see table below)
January purchases (0.50 × $90,000)
February purchases:
(0.50 × $80,000 × 0.98)
(0.50 × $80,000)
March purchases (0.50 × $96,000 × 0.98)
Total cash disbursements
C.
February cash disbursements = $85,000
March cash disbursements = $88,000
January purchases (0.50 × $90,000)
February purchases:
(0.50 × $80,000)
(0.50 × $80,000)
March purchases (0.50 × $96,000)
Total cash disbursements
159. Wexler Company expects sales of $40,000 in July, $50,000 in August, and $30,000 in September. Wexler’s
experience is that 40% of sales are cash, and the remainder is on account. Accounts receivable are paid: 70% in the month
of sale, and 25% in the following month.
A.
What are the expected cash receipts on accounts receivable in August for July sales?
B.
What are the expected cash receipts on accounts receivable in August for August sales?
C.
What are the total expected cash receipts on accounts receivable in August?
D.
What are the total expected cash receipts in August?
E.
How much of July sales are deemed to be uncollectible?
A.
Expected cash receipts on accounts receivable in August for July sales = $6,000
[(0.60 × $40,000 × 0.25) = $6,000]
B.
Expected cash receipts on accounts receivable in August for August sales = $21,000
[$21,000 = (0.60 × $50,000 × 0.70)]
C.
Total expected cash receipts on accounts receivable in August = $27,000
[$27,000 = (0.60 × $40,000 × 0.25) + (0.60 × $50,000 × 0.70)]
[$47,000 = (0.60 × $40,000 × 0.25) + (0.60 × $50,000 × 0.70) + (0.4 × $50,000)]
Chapter 9 – Profit Planning
160. Shorter Company developed the following data for the month of June.
1.
June 1 cash balance $2,300
2.
Cash sales in June $67,000
3.
Credit sales for June are $20,000; for May $10,000; and for April $16,000. 60% of credit
sales are collected in the month of sale, 20% in the following month, and 10% in the second
month following the sale.
4.
Purchases for May were $34,000 and for June are $40,000. Half of purchases are paid in the
month of purchase and the remainder in the following month.
5.
June salaries are $28,400, utilities are $1,090, and depreciation on the building is $1,000.
A.
Anticipated cash receipts from accounts receivable in June equal $__________________.
B.
Anticipated total cash available in June is $__________________.
C.
June cash payments for purchases are $__________________.
D.
Anticipated cash balance on June 30 is $__________________.
A.
Anticipated cash receipts from accounts receivable in June = $15,600
[15,600 = ($20,000 × 0.60) + ($10,000 × 0.20) + ($16,000 × 0.10)]
B.
Anticipated total cash available in June = $84,900
[84,900 = $67,000 + $15,600 + $2,300]
C.
June cash payments for purchases = $37,000
[37,000 = ($40,000 × 0.50) + ($34,000 × 0.50)]
D.
Anticipated cash balance on June 30 = $18,410
[18,410 = $84,900 − $37,000 − 28,400 − 1,090]
161. Calino Company developed the following data for the month of August.
1.
August 1 cash balance $12,300.
2.
Cash sales in August $80,000.
3.
Credit sales for August are $30,000; for July $40,000; and for June $40,000. 70% of credit
sales are collected in the month of sale, 15% in the following month, and 10% in the second
month following the sale.
4.
Purchases for July were $50,000 and for August are $40,000. One-fourth of purchases are
paid in the month of purchase and the remaining three-quarters in the following month.
5.
August salaries are $31,400, utilities are $3,220, and depreciation on the building and
equipment is $10,000.
A.
Anticipated cash receipts from accounts receivable in August are $__________________.
B.
Anticipated total cash available from all sources in August is $__________________.
C.
August cash payments for purchases made in July and August are
$__________________.
D.
Anticipated cash balance on August 31 is $__________________.
A.
August cash receipts from accounts receivable = $31,000
B.
August anticipated total cash available from all sources = $123,300
July sales of $40,000 × 0.60 = $24,000 on account
$24,000 × 0.05 = $1,200 uncollectible
Chapter 9 – Profit Planning
August cash payments for purchases = $47,500
Anticipated cash balance on August 31 = $41,180
July ($40,000 × 0.15)
August ($30,000 × 0.70)
Beginning balance
Cash sales
Payments from Accounts Receivable
Cash available
Payments on July purchases ($50,000 × 0.75)
Payments on August purchases ($40,000 × 0.25)
Total disbursements
Cash balance, August 31
162. It is May 28 and you have just gotten a summer job that will pay you (net of taxes) $800 per month. You start June 1
and will work until school starts − halfway through August. Your scholarship pays for tuition, room and board. But you
must buy books, pay for transportation to and from school, and pay for clothing, any extra meals, entertainment, and so
on. You have gathered the following data:
1.
One round trip airline ticket is $260, and you’d like to come home for Thanksgiving (your
parents will drive you there in August, and you will try to catch a ride home with another
student in December).
2.
Books are estimated to cost about $500 per semester for your anticipated major
3.
Supplies should be another $150
4.
Clothing might run $100 − you already have almost everything you think you’ll need.
5.
There are 16 weeks in the semester, and you think you’ll need $50 per week for allowance to
cover extra meals and entertainment
6.
Before school even starts, you need to cover any summer expenses, including going out with
friends. $30 a week sounds about right, since all your friends will be working and saving for
college as well. There are 11 weeks of summer.
Right now, you have $200 in your checking account.
A.
Prepare a cash budget for the summer and the first semester of college. (Do the entire
time period; do not break it down by week or by month.)
B.
Comment on the estimated ending balance. What actions can you take, if any, to increase
it?
Beginning balance checking account
Salary from summer job (2.5 × $800)
Cash available
Less disbursements:
Airline ticket
Chapter 9 – Profit Planning
Books
Supplies
Clothing
Weekly allowance at school (16 × $50)
Weekly allowance during the summer (11 × $30)
Total disbursements
Estimated ending balance
estimated allowances can be cut. The real problem is that these are estimates. So perhaps
163. Miller Corporation has the following sales budget for the first four months of the current year:
Month
Sales
January
$400,000
February
$320,000
March
$440,000
April
$360,000
Historically, the following trend has been established regarding cash collection of sales:
65% in month of sale
25% in month following sale
8% in second month following sale
2% uncollectible
The company allows a 2% cash discount for payments made by customers during the month of the sale. November and
December sales were $400,000 and $240,000, respectively. All sales are on account.
Required: Prepare a schedule of budgeted cash collections from sales for January, February, and March.
November
$400,000 × 8%
December
$240,000 × 25%; 8%
$400,000 × (65% ×
$320,000 × (65% ×
98%)
Total cash collections
$346,800
$323,040
$392,280
164.
Allan Corporation has a sales budget for March of $440,000. About 10% are cash sales
and the remainder is sold on account.
The company expects that 60% of credit sales will be collected in the month of the sale,
25% in the next month and 10% in the following month.
Materials purchased on account are expected to be $250,000. Allan pays 35% in the month
of the purchase, 50% in the month following the purchase and the remaining 15% in the
Chapter 9 – Profit Planning
second month after the purchase.
Salaries and wages of the workers are approximately $45,000 per month. The employees
are paid weekly so on average 95% of their wages are paid in the month to which they
relate and the remaining 5% is paid in the following month.
Utilities average $4,300 per month.
Rent on the building is $9,000 per month.
Insurance is $3,000 per month and advertising costs are $1,000 per month.
February sales were $320,000 and purchases of materials in February were $170,000;
January sales were $200,000 and purchases of materials in January were $130,000.
The cash balance on March 1st is $5,400.
Required:
A.
Prepare a schedule of cash receipts
B.
Prepare a schedule of cash payments (Accounts payable payments)
C.
Prepare a cash budget
Cash receipts for March
January collection (200,000 × 90% ×
March cash sales (440,000 × 10%)
March accounts receivable
Total cash collection
Cash disbursements for March
January payment (130,000 ×15%)
February payment (180,000 × 50%)
March payment (250,000 × 35%)
Total cash disbursements
C.
Beginning cash balance
Cash collections
Cash available
Less disbursements:
Payments for:
Raw materials
Total disbursements
Ending cash balance
165. Trish Morrow owns and operates Yummy Bakery which sells a wide variety of cupcakes. She has compiled the
Chapter 9 – Profit Planning
following data and information in order to put together a cash budget for September and October.
• Budgeted sales for September are 65,000 cupcakes and 98,000 in October. Each cupcake sells for $3.50.
• On average 60% are cash sales and 40% are sold on account.
• The company expects to collect 75% of credit sales in the month of the sale and 20% in the month after the sale.
• All necessary raw materials are purchased on account. Purchases are paid 85% in the month of the purchase and
15% in the following month. Purchases for September are estimated to be $200,000 and $290,000 in October.
• Monthly expenses include:
• Wages $10,000
• Rent $4,000
• Utilities $3,500
• Insurance $2,500
• Advertising $2,290
• Cash balance on September 1st was $6,000.
• The company has a policy to maintain a minimum cash balance of $5,000. If necessary the company will borrow
to meet its short-term needs. All borrowing is done at the beginning of the month and all payments on principal
and interest are made at the end of the next month. The annual interest rate is 7%. The company must borrow in
multiples of $1,000.
• August sales were 43,000 cupcakes and raw materials purchased equal $230,000.
Prepare a cash budget for September and October.
Chapter 9 – Profit Planning
166. Dickson Company has the following projected account balances for September 30 of the current year:
Accounts payable
$20,000
Sales
$400,000
Accounts receivable
50,000
Capital stock
200,000
Depreciation, factory
12,000
Retained earnings (beginning)
64,000
Inventories (8/31)
90,000
Maintenance, factory
14,000
Inventories (9/30)
90,000
Cash
28,000
Materials used
100,000
Equipment, net
120,000
Office salaries
40,000
Buildings, net
200,000
Insurance, factory
2,000
Utilities, factory
8,000
Factory wages
70,000
Selling expenses
30,000
Bonds payable
80,000
Required:
A.
Prepare a budgeted income statement for the month ended September 30.
B.
Prepare a budgeted balance sheet as of September 30.
Sales
$400,000
Cost of goods sold:
Beginning inventory
$ 90,000
Materials used
100,000
Factory wages
70,000
Depreciation
12,000
Maintenance
14,000
Utilities
8,000
Ending inventory
206,000
Beginning cash balance
Cash collections
Total cash available
$222,790
$331,900
Cash disbursements:
$204,500
$276,500
Wages
10,000
10,000
Rent
Utilities
Insurance
Advertising
Total disbursements
$226,790
$298,790
Minimum cash balance
Total cash needs
$231,790
$303,790
Excess (deficiency)
$ 28,110
Financing:
Borrowings
$ 9,000
Repayments
Interest
Total financing
$ 9,000
Ending cash balance
$ 5,000
$ 24,005
Chapter 9 – Profit Planning
167. What are the advantages of budgeting?
168. Which budget is the first one that must be completed in the master budgeting process and why?
169. You are the senior accountant at Cannon Manufacturing and have been asked by the budget director to prepare the
production budget for the upcoming quarter. The budget director stated that they chose you to prepare this budget because
it is an important part of the overall operating budget and financial budget. Explain what the production budget calculates
and how the production budget would affect other operating budgets and the financial budget.
170. Does a not-for-profit agency need to budget? Why or why not?
Chapter 9 – Profit Planning
171. Briefly describe the attributes of an ideal budgetary system. What features of budgeting have been identified that
encourage positive behavior?
172. Describe some problems with participative budgeting.
Identify each item as a component of the production budget or the direct materials purchases budget.
a.
production budget
b.
direct materials purchases budget
173. beginning inventory of materials
174. sales in units
175. units of raw materials needed for each unit of product
176. ending inventory of product
Identify each item as either part of the operating budget or the financial budget.
a.
Operating Budget
foundation for the fall fundraising efforts.
Chapter 9 – Profit Planning
b.
Financial Budget
177. production budget
a
178. sales budget
a
179. cash budget
180. ending finished goods inventory budget
a
181. budgeted balance sheet
182. budgeted capital expenditures
Identify each item as an advantage or disadvantage of budgeting.
a.
advantage
b.
disadvantage
183. Pseudoparticipation
184. forces managers to plan
a
185. improves communication and coordination
a
186. leads to budgetary slack
187. provides standard for performance evaluation
a